Reduce Overhead & Improve Your Cash Flow
The lifeblood of any business is its cash flow — that steady stream of
dollars and cents that comes from sales and flows out in the form of wages,
inventory, rent, insurance and other expenses. Unfortunately, there are
times when there’s more “out” than “in,” and only sheer perseverance keeps
entrepreneurs trying to close the gap instead of closing the doors.
When the cash creek is running dry, business owners have to look
closely at how to tap the financial resources dammed up in slow-moving
inventory, and how to reduce the stream of regular expenses that threatens
to drain the bank account completely.
Most companies can benefit by jumping on the JITney of “just in time”
inventory control as a first step, since this approach has the potential to
greatly reduce carrying costs. But how do you reduce inventory so that you
are running lean and mean without jeopardizing future sales by being
Start by calling your trade association to find out the average
inventory turnover rate for your industry, and compare that figure with
your own average inventory turnover rate to see how good a job you are
doing now. The formula is simple: divide the cost of goods sold by the
average value of your inventory to get your average turnover rate.
Suppose Premier Prizes started the year with $150,000 worth of
inventory and ended with $200,000; its average inventory would have been
$175,000 (the two amounts added together and divided by two). If the firm
sold goods costing $525,000 in the same period, the average inventory
turnover would have been three times a year, or once every four months.
If the industry turnover for the same type of business is four times
a year, or once every three months, Premier Prizes has the potential for a
25 percent improvement in its inventory management (using the industry
average as a benchmark that can realistically be emulated). It doesn’t
take a genius to calculate that the company could do the same volume of
business with one-fourth less inventory or only $130,000 worth, thus
infusing its cash flow with the difference — or an additional $45,000.
The question then becomes one of determining where Premier is
overstocked. To find out, examine the average turnover for each stock
item. By comparing how many of each item was sold in an inventory year
with the item’s end-of-year inventory, you can come up with an analysis
sheet like the following for Premier Prizes:
Number Sales in last Excess Action
in stock 90 days on hand to take
Golf trophies 84 30 54 Reduce
Book sets 380 45 335 Reduce
Gift baskets 60 59 1 None
Crystal goblets 84 108 (24) Increase
Balloon rides 110 35 75 Reduce
Bread machines 12 2 10 Eliminate
The chart pinpoints which items of stock can be reduced to the amount
normally sold in a quarter, shows where the company is on target, and warns
where understocking could cause a problem. The chart also identifies items
with so few sales they should probably be dropped.
Next list the overstocked items that are selling well enough to
warrant holding the excess. Premier might tag the golf trophies: “Not to
be reordered until on-hand stock drops to between 20 and 30 units,”
assuming it takes a month from writing up an order until the goods are
Then list the overstocked items that would be worth selling at a
discount to recover the cash. The owner of Premier Prizes might want to
sell a portion of the 22-month supply of book sets to a jobber, approach a
local cooking school about offering the bread machines at a reduced rate to
its students, and provide the company’s sales staff with bonus commissions
for each balloon ride premium sold.
You might be carrying items that turn over slowly because some of your
better customers occasionally order them, or because they return
exceptional profits. Instead, see if your vendor will accept orders for
single units with 24-hour delivery. The additional handling charges will
probably be less than your current carrying costs.
JIT inventory management may be your most important way to reduce
overhead, but don’t ignore the smaller items that can also add up to
significant amounts. One approach is to list your overhead costs in
descending order of expense. The result is a prioritized list of which
costs to examine first to see if they can be reduced.
Don’t dismiss any item as “impossible to reduce” until you have
scrutinized it carefully and involved your staff in looking for new
options. It’s equally important not to drop expenses that contribute
significantly to the long-term management of your operation. Many
companies, for instance, drop all employee training when cash is tight; it
might be better to find lower-cost training while business is slow and more
time is available. Otherwise you might fall behind the competition when
the economy picks up, especially if the competition has not cut back on
these types of important long-term expenditures.
When cash is short, the natural inclination is to put off paying bills
as long as possible, but this could backfire. After all, do you give your
best service to slow payers? Do negotiate a longer payment term if you
need it; but then be sure to make your payment on time.
If your business requires periodic air travel, charge everything
(including inventory and supplies) on a credit card that earns mileage
points. With the recession, a franchise owner in El Granada, California,
found that mileage points made the difference in being able to continue her
on-site training of regional representatives.
When business slows down you have the time — and the imperative — to
examine every part of your operation and streamline procedures. Use charts
showing the flow of all paperwork, orders and product movement to reveal
unnecessary steps and bottlenecks. Identify the function of each step, and
decide if it’s a needed one. Analyze results, not efforts, to gauge which
employees should stay where they are, which should be retrained, and which
should be let go.
Determine your ideal number of employees by comparing your needs
during your slackest times with your average days. Staff for your minimum
needs as long as that level will not compromise service most of the time.
It’s less costly to pay overtime, or bring in temporary help during peak
periods, than to keep unnecessary employees on the payroll.
Involve your staff in a drive to increase efficiency. When they come
up with money-saving ideas, show your appreciation. While bonuses are
nice, what counts most with people is a public “thank you.”
Also involve your staff in cutting the cost of employee benefits
without compromising the quality or scope of coverage. For example, one
entrepreneur who pays for employees’ child care asked them to choose more
economical facilities whenever possible. Many small company owners take
pride in offering health care insurance, yet the costs may be crippling
when business is slow. Rather than reduce or eliminate health care,
investigate using a local HMO or clinic for all out-of-hospital services,
or band together with other employers to get a lower group insurance rate.
Reduce training costs by providing incentives for employees who are
willing to upgrade their skills at their own expense. A Denver, Colorado
company permits such employees to take some or all of the training time off
at full pay. The firm insists that courses be of professional quality and
relate to current work, or to work into which the employee can eventually
Next look at your cost of facilities. Compare your rent with what you
might pay if you moved, and then ask your current landlord if your lease
can be renegotiated. If you are willing to sign a longer lease, you may
get a price break now or have the rent forgiven or deferred in your slowest
months. If you decide you must move, look for a new landlord who will pay
off your current lease and cover your moving expenses. Also consider
shrinking the area you occupy and subleasing some of the remaining space.
If you own your building, ask your banker about refinancing at a lower
interest rate or over a longer term. Either option will reduce your
Combine forces with non-competing businesses to share expenses. In
Marietta, Georgia, five small lighting companies with non-competing
products share showroom, receptionist and office costs. They cover each
other’s sales areas, brainstorm together before bidding on big contracts,
and help in answering technical questions.
Shop for cheaper insurance — the rates vary widely, but so do the
products and services when it comes time to make a claim. Know precisely
what you are getting in a particular policy, and deal with an “A-” (or
better) rated company.
How you heat and cool your office and work space can also make a
difference in your overhead costs. Questioning abnormally high bills,
adding insulation, replacing old air conditioners with high-efficiency
models, and wrapping hot water heaters, are steps that work for businesses
as well as homes. Converting to fluorescent lighting will garner
considerable savings; but do
invest in fixtures that provide even lighting on work spaces and don’t
cause glare. It’s pointless to save money on lighting only to increase
your labor costs because of fatigued and inefficient workers. And don’t
forget to call your local utility to see what programs and financial
incentives it may be offering to increase energy efficiency.
Renegotiate fees from outside advisors such as lawyers and
accountants. Ask if you can have a better rate by paying by the hour, by
the project, or on a retainer basis. Some such professionals will react
with “why should I cut my fees just because your profits have dropped?” but
most will be sympathetic to the fact that economically slow times trim
everyone’s profit margins.
Investigate what banking services you are paying for to see if any are
superfluous or if additional ones may be advantageous. Combining checking
accounts may save service fees and earn higher interest on balances, or
even qualify you for free checking.
Track responses to your advertising and promotional efforts. To spend
your advertising dollars effectively, you need to know what produces leads,
and what generates profitable sales. For example, several special-category
Yellow Page ads may pull better than a single large ad under your major
Owning your phones is usually more advantageous than renting,
especially when you put the savings into phone services that provide more
effective operation. Investigate the different services available for both
local and long distance calls. Ask about volume discounts for certain time
periods, to particular geographical areas, and to specific phone numbers.
Screen out unnecessary long distance calls. You can handle many
customer inquiries professionally and promptly, if informally, by writing
the answer on a facsimile form and sending it off within minutes of
opening the morning mail. As an example, a recent one-page response sent
from California to New Hampshire cost 25 cents to fax, 29 cents postage
plus an envelope to mail, and three or four times that amount for a long
distance phone call.
Keep only the dues and subscriptions that serve you with valuable
information and professional networking opportunities, or make you more
visible in the community. An expensive golf membership has to be evaluated
in terms of whether your income would drop without it.
And while on the golf course, ask your buddies what they are doing to
reduce overhead. Networking can find you a
better bookkeeper, a less expensive janitorial service or a tip for
trimming your inventory still further so that your business is buoyantly
afloat and doing well when the economic tide turns.
T & B MUFFLER TRIMS OVERHEAD COSTS
T&B Mufflers in Sylmar, California, which supplies mufflers and related
parts to independent shops and retail customers, has seen its annual sales
go down as much as 15 percent during the past two years of economic
doldrums. Nancy Whitcomb, daughter of founder Tom Ryan and singlehandedly
in charge of administrative functions, describes measures the company has
taken as a result to trim overhead costs. “We’ve put off moving to a
larger location and instead reorganized existing stock to increase
efficient use of space,” she explains. “And we’ve cut back on inventory
overall so we don’t have so much money tied up in the warehouse. We also
return slow-moving parts so we’re not sitting on them too long, but rather
turning over merchandise. We renegotiated our lease down one-third so the
rent was comparable to the per foot amount currently commanded in the
area,” Whitcomb continues, “and shopped around for better health insurance
rates that now save us $500 per month. Finally, we’re doing our printing
of flyers and catalogs in-house (using a computer in my husband’s office)
rather than sending them out.”